Money is a medium of exchange used to facilitate transactions and store value. It solves the problem of barter. Without money, a farmer who wants shoes must find a shoemaker who wants grain. With money, the farmer sells grain for cash and buys shoes from anyone. The transaction becomes simple and flexible.

Money has three functions. It is a medium of exchange, a unit of account, and a store of value. As a unit of account, it provides a common measure for pricing goods. As a store of value, it lets people save purchasing power for later. Inflation erodes that function. In extreme cases, people abandon the currency and turn to alternatives like foreign money or goods.

Forms of money have evolved. Commodity money, like gold and silver, has intrinsic value. Representative money, like banknotes backed by gold, represents a claim on a commodity. Fiat money, used today, has value because governments declare it legal tender and because people trust it. Digital money and cryptocurrencies add new layers. The physical form changes. The underlying functions remain the same.

Key functions

• Medium of exchange
• Unit of account
• Store of value
• Standard of deferred payment
• Legal tender